Tuesday, April 12, 2011

Cheryl Eckard repeatedly warned senior managers at GlaxoSmithKline that defective drugs were being produced at its Puerto Rico plant. Rather than address the problems, they fired her.

Eckard filed a whistle-blower suit. Last October, GlaxoSmithKline agreed to pay $750 million to settle criminal and civil complaints that the company knowingly sold contaminated drugs made at the now-closed plant. Eckard received $96 million.

The number of whistle-blower suits—and the related payouts—have been growing in recent years under federal and state laws aimed at uncovering fraud and protecting the public. Corporate lawyers fear another surge of whistle-blower complaints will result from passage of the Dodd-Frank Act. The law, which significantly increases rewards and protection to those blowing the whistle on securities violations, affects publicly held companies and their private subsidiaries and affiliates.

The U.S. Securities and Exchange Commission (SEC) is scheduled to release regulations implementing the law in April. Employers better get ready.

To reduce the risk of an expensive and embarrassing government investigation, company leaders must step up internal reporting procedures and management training to encourage employees to report their concerns to the company first, lawyers say. And HR managers must play a critical role in those processes.

"There is a sense of urgency about ethics that didn't exist before," says Daniel F. Carey, director of human resources and employment counsel at O&G Industries Inc. in Torrington, Conn., and a member of the Society for Human Resource Management's (SHRM) Ethics Special Expertise Panel.

"The No. 1 defense that a company can muster against these new whistle-blower rules is positive employee relations," Carey says. "You need to have a relationship with your employees so they come to you, so they're not racing to the SEC to be the first ones to report this problem."

The Bounty

The GlaxoSmithKline case was prosecuted under the federal False Claims Act. The act has been the most successful avenue to date for whistle-blowers and government investigators who rely on them. The U.S. Justice Department collected $3 billion in civil settlements and judgments in cases involving fraud against the government last year—$2.3 billion with the help of whistle-blowers.

The so-called bounty system in False Claims Act cases was so useful that the SEC is now proposing to offer whistle-blowers up to 30 percent of any amount above $1 million that the government recovers. Corporate lawyers argue that the proposed regulations would entice disgruntled employees to circumvent internal reporting methods with the goal of getting hefty rewards.

"You're essentially creating a financial incentive for employees to breach their duty of loyalty to their employer by going to an agency before they go to the employer," argues Daniel P. Westman, a partner with Morrison & Foerster LLP in McLean, Va.

Steven J. Pearlman, a partner at Seyfarth Shaw LLP in Chicago, says he has been receiving calls from employers that want to know how to respond to the proposed regulations. Employers poured money and training into complying with the federal Sarbanes-Oxley Act, enacted in 2002 in response to the Enron scandal, Pearlman says. Now, the SEC's proposed bounties pose a "risk of eviscerating, totally gutting, those compliance mechanisms," he says.

The Association of Corporate Counsel, in Washington, D.C., along with 270 in-house lawyers, urged the commission to require individuals to first report concerns through internal compliance systems.

However, whistle-blower advocates say that would allow corporate executives to sweep problems under the rug.

Stephen M. Kohn, executive director of the National Whistleblowers Center in Washington, D.C., says arguments raised by corporate officials imply that "a white-collar criminal has more rights than a blue-collar criminal. If you're a white-collar criminal and you're defrauding investors, why should you be told that you're going to be turned into the police? You've committed a crime. You should be reported."

When illegal behavior is condoned by senior managers, employees limited to internal reporting have no recourse, adds Kohn, whose organization supports whistle-blowers in court and before Congress.

Bounties offer safety nets for whistle-blowers who jeopardize their jobs and careers to provide government with information on lawbreakers.

For whistle-blowers with valid claims, bounties "reward them for the trouble and the risk," says Reuben A. Guttman, a director at the law firm of Grant & Eisenhofer and co-founder of Voices for Corporate Responsibility in Washington, D.C.

The Motives

In interviews with 26 whistle-blowers in the health care field, researchers found most were motivated by integrity, altruism or public safety, justice, and self-preservation, but integrity was cited most frequently, according to a 2010 study in the New England Journal of Medicine. The whistle-blowers frequently were exposed to questionable practices when they started new jobs or were promoted.

That was the case with John Schilling, hired in 1993 by Columbia Healthcare Corp., now HCA Inc., to oversee Medicare reimbursements for five hospitals. Within months, he discovered the company was claiming expenses not allowed by government. Senior managers ordered him to keep quiet and devised a plan to distract government auditors.

"I felt like it was stealing from the taxpayers, stealing from the Medicare beneficiaries we were supposed to be taking care of," Schilling recalls.

A lawyer told him he could be found personally liable if he didn't speak up. So Schilling worked undercover for federal investigators, recording phone calls and wearing wires to meetings. The government recovered more than $1.7 billion in 2003.

After Blowing the Whistle, Psychologist Faces Challenges

Janet Chandler, a Chicago psychologist, spent 12 years embroiled in lawsuits against her former employer, Cook County Hospital. In 1995, she reported to superiors her concerns about mismanagement of a $5 million federal research grant for a study of pregnant drug-dependent women. When she was fired several months later, she was shocked.

"I spent my career working with indigent minority women and children, those who didn't have a voice," Chandler says. "I was trained that if you have a concern, you bring it to higher-up officials. That's exactly what I did."

She developed stress-related health problems, including diabetes. Her husband left her. With no money coming in, her daughter had to drop out of college temporarily. Her sons, ages 7 and 12, watched as their car was repossessed. "It's burned in their memories—our lives before the suit and our lives after the suit," she says.

Chandler's case went to the U.S. Supreme Court in 2003, where judges sided with her in a landmark decision that found local governments could be held liable under the False Claims Act. In 2006, she collected less than $1 million; legal fees, taxes and debt left her with just $200,000. In 2008, at age 60, Chandler could afford to buy her first house, a bargain dwelling.

"I may have won in court, but I have to work for the rest of my life and I have no pension," says Chandler, who has a part-time private practice and does consulting. Yet, she doesn't regret her decision to report wrongdoing: "It was a concern for public safety and a matter of ethics and integrity," she says.

The Consequences

Historically, companies have treated whistle-blowers "the same way that any animal views a threat," says Tom Devine, legal director with the Government Accountability Project, a whistle-blower advocacy group. "The more responsibility an employee has, the more significant the disclosure's potential and the more vicious the likely retaliation. That's because officials with more responsibility have the capacity to pose a greater threat to institutional wrongdoers so there's more motive to engage in more intensified, uglier retaliation."

Jeffrey Wigand, a former tobacco executive whose testimony led to a historic $246 billion tobacco industry settlement with 40 states, says he received death threats that necessitated his being protected by two bodyguards for almost a year while helping government attorneys make their case. A bullet was left in his mailbox with a note threatening his children. He lost his job, his career and even his family after his wife divorced him.

In a 2007 study, the nonpartisan National Bureau of Economic Research found that in 82 percent of cases where whistle-blowers' identities were revealed, the employees were fired, quit under duress or lost significant job responsibilities.

The Ethics Resource Center's 2009 National Business Ethics Survey report found that 15 percent of employees who reported misconduct said they experienced retaliation. Of those, nearly half said they almost lost their jobs, and 43 percent said they were denied raises or promotions.

In the New England Journal of Medicine study, six whistle-blowers reported divorces, severe marital strain or other family conflicts, and 13 reported health problems. "The prevailing sentiment was that the payoff had not been worth the cost," researchers reported.

Glenn DeMott of Columbus, Ohio, numbers among six whistle-blowers who aided federal officials in a case that led Pfizer to settle for $2.3 billion in 2009 for illegal marketing of drugs. DeMott, once a top salesman, prided himself on giving physicians accurate information. "I wasn't willing to make comments that were false and misleading," he says. Even before he was fired, he developed asthma and "was totally stressed-out." He still battles depression and has yet to find employment.

Help Workers Speak Up

To encourage its 1,900 employees to report wrongdoing internally, AMN Healthcare in San Diego recently launched a program called "Speak Up."

"Statistically, it's the most important way you find out about wrongdoing—from your employees," says Senior Corporate Counsel Jennifer MacDougall. "A couple of principles that we try to make clear to everybody are that it's every employee's responsibility to report suspected misconduct; it's also every employee's right," she explains. "And, they don't have to know all the facts, just a good-faith suspicion. We want to make sure people know if there is something that doesn't seem right to them, they should come forward."

New employees get introduced to those principles at orientation, managers conduct face-to-face training, and longtime employees receive annual surveys asking about misconduct. Managers receive periodic training on how to encourage and handle reports.

Recently, MacDougall and Lisa Larson, the human resources director, took a lighter approach to capture employees' attention. They e-mailed employees interactive cartoons that imitate a game show—"To Call or Not Call?"—to teach the specific types of misconduct that should be disclosed.

As one of her final questions during exit interviews, Larson asks whether departing employees noticed any fraudulent acts or violations while at the company.

Cheryl Sachse, employee relations manager for SkyWest Airlines in St. George, Utah, acknowledges that open-door policies can be abused by some employees who use reporting channels as gripe sessions. "There are some people who would never report anything, and when they do, you know it's serious; other people report every tiny thing."

Is Anybody Listening?

A National Whistleblowers Center study last year found that 89.7 percent of employees who eventually filed False Claims Act lawsuits initially reported their concerns internally, either to supervisors or compliance officers.

Similarly, the Ethics Resource Center survey found that more than 90 percent of employees who blew the whistle went to someone inside the company; only 4 percent went outside the organization.

Employees typically go to an outside agency only when they are ignored or punished for speaking up within their organizations, Kohn says. "It's the retaliation that pushes them."

Instead of focusing on weeding out whistle-blowers, corporate leaders should consider "how they handle internal concerns and to what extent they are preventing retaliation of employees who come forward," says Donna C. Boehme, a principal with Compliance Strategists LLC in New Providence, N.J. She serves on the board of the RAND Center for Corporate Ethics and Governance and as program director for The Conference Board Council on Corporate Compliance and Ethics.

"Dodd-Frank shines a spotlight on how effective companies have been at creating real programs, rather than ones that just look good on paper," Boehme adds.

A SHRM poll conducted in January found that a minority of companies have hotlines. Of 361 respondents indicating they encouraged employees to use specific methods to report organizational wrongdoing, only 41 percent provided ethics hotlines.

The number of employers providing hotlines increased after the Sarbanes-Oxley Act required publicly traded companies to provide a confidential mechanism for employees to report misconduct. Confidentiality was supposed to help ease employees' fear of retaliation.

However, the Ethics Resource Center survey found that only 3 percent of all reports of wrongdoing come through hotlines—possibly indicating that employees don't trust them. They might be right: A study by the University of New Hampshire concluded that corporate officials take anonymous complaints less seriously and devote fewer resources to them.

There's a business reason for listening to employees' concerns: In a 2008 study examining 959 cases of fraud involving U.S. companies, the Association of Certified Fraud Examiners found that 46 percent were uncovered by whistle-blowers—more than the number of frauds discovered by audits or internal controls.

The Culture

The best way to keep out of legal trouble is to create a culture of integrity, starting with company leaders.

"A written policy is not enough," says Westman, the Virginia lawyer. "It's got to be talked about. It's got to be internalized. Employees have to be made to care about it. Of course, they won't if they think management doesn't."

HR managers, working with compliance and ethics officers if their companies have them, must persuade employees that it's safe to report wrongdoing through internal channels. That means creating and enforcing nonretaliation policies.

HR managers often are the first to hear complaints. They need to know how to react when people raise concerns. "One mistake you can make is to judge the veracity of the claim at the moment it's made," O&G Industries' Carey says. "In other words, don't jump to the conclusion that there's no basis."

HR professionals can train supervisors to be receptive to employees' complaints. Even a casual comment by the supervisor can send the wrong message. After an employee has complained internally or externally, managers shouldn't restrict access to documents or meetings, or do anything that could be perceived as retaliation and prompt a lawsuit, Carey says.

"Almost any action that an employer takes has the potential to be viewed as retaliation—even if it's 'No, you can't look at that file anymore,' " he explains. "It does get tricky. You can't diminish the person's position, even for access. They still should be able to go to the same meetings they went to before. In the eyes of the law, raising an issue to the SEC is not poor performance. It's not grounds for discipline. It's the opposite."

Boehme advises employers to develop clear guidelines for investigations and ensure that anyone conducting investigations is trained in those guidelines.

"I once reviewed a case where the security group, including a number of ex-law enforcement, decided to have seven questioners in a room interviewing a single employee, who was only a witness and not even the suspected wrongdoer," she says. "When managers are left to their own devices to conduct an investigation, even good people can make terrible judgments."

Names of employees should be kept confidential, and employees should be told not to discuss cases with anyone but investigators, Carey says.

However, in situations where employees work closely together and relationships might become tense, the HR manager should tell the accused and the accuser, in a clear and nonintimidating way, that they are still responsible for doing their jobs and may be subject to discipline if they don't, Westman advises.

"Angry managers who are accused may need special attention and counseling, including being advised that their visible reactions, or changed behaviors, in response to the situation may be used as evidence of retaliatory motive," he says. Company leaders should anticipate this kind of disruption to the workplace, discourage it at the outset, monitor how the work progresses and step in to reset relationships if necessary.

In extreme cases, Carey says, the HR team may create a temporary reporting structure to avoid friction between employees or may move workspaces, but it's better to make such changes at the employees' request to avoid any appearance of retaliation. Before making changes, the HR manager should consult with the company's attorney and document the reasons for the action.

A Patchwork of Protection

There are 47 federal laws protecting the rights of corporate workers to report wrongdoing, including 12 passed by Congress in the past decade.

They are a patchwork of legal protection for employees in industries from airlines to food preparation. Most only offer fired whistle-blowers reinstatement and back pay. Only the Dodd-Frank Act, False Claims Act and an IRS statute offer whistle-blowers financial rewards for their help in uncovering wrongdoing.

In addition, every state except Alabama has some type of whistle-blower protection, according to the National Whistleblowers Center. Twenty-five states have false claims acts, and 46 states have statutory or common-law protections.

The Reporting Channels

Company leaders should offer employees many ways to report wrongdoing, in case workers aren't comfortable going to managers. However, it's a mistake for employers to think they are in good shape because no reports come in. Employees may be too intimidated to report concerns, Westman notes.

Every report of wrongdoing should be investigated promptly. And, the employee who made the report should be told afterward how the investigation was resolved so he or she knows it was taken seriously.

This type of follow-up "makes the employee much more trusting to go to the employer for future issues," says Connie Eggleston, PHR, human resources manager at Farmers State Bank in Calhan, Colo.

AMN Healthcare in San Diego periodically posts the results of investigations—with names deleted—on its intranet and in its electronic newsletter to employees. The HR department recently posted the comments of an employee whose report prompted changes in some procedures. Although this employee said she felt uncomfortable reporting her concerns at first, "I now am an advocate of speaking up when someone witnesses these types of experiences. HR kept me updated throughout the process. The right people were informed and asked to investigate, and my confidentiality was maintained."

Taking a page from government, some company officials are exploring offering rewards to encourage workers to report internally, Pearlman says. In the SHRM poll, 3 percent of respondents said their companies offer financial incentives to encourage employees to report wrongdoing. Boehme suggests creating incentives for ethical leadership as well, by incorporating ethics into managers' performance reviews.

Pearlman advises corporate leaders to require employees to certify several times a year whether they are aware of fraud or misconduct.

Executives often can minimize the fallout by discovering problems and reporting them to an outside agency before a whistle-blower does, so executives should establish procedures for self-reporting, lawyers say.

However, the best way for leaders to reduce the risk of whistle-blower lawsuits and expensive government investigations is to set high ethical standards and treat whistle-blowers as assets, Pearlman says. "If they know of fraud, they can detect it and bring it to your attention earlier so you can nip it in the bud."